As you might be aware, fiduciary liability insurance and ERISA fidelity bonds are not one and the same. Both serve to mitigate risk for fiduciaries, and both are critical aspects of an employee benefit plan. However, it’s important to understand the differences between these two safety nets, as well as the degree to which your plan should be protected by each.
ERISA Fidelity Bonds: The Basics
ERISA fidelity bonds are required by law and, if invoked, cover any plan losses that result from fraud. The Department of Labor’s ERISA Section 412 outlines this, stating that all fiduciaries of employee benefit plans, and every person who comes into contact with plan assets, be bonded.
There is a good deal of confusion surrounding adequate bonding. In fact, the IRS reports that one of the largest compliance issues among fiduciaries is having the proper amount of ERISA fidelity bonding.
It may be helpful to speak with your plan administrator for assistance about your specific bonding needs, but ERISA lays out a general framework as follows:
- ERISA fidelity bonds must be equal to at least 10% of the plan funds a fiduciary handles.
- There is a minimum bond of $1,000 per plan.
- Generally speaking, ERISA cannot require more than $500,000 in bonding per plan.
- However, for plan officials holding employer securities, the maximum required bond amount is $1 million.
Both for the protection of your plan participants and their assets, adequate ERISA fidelity bonds are essential. ERISA has the authority to sue plans that do not have appropriate coverage. This is a tremendous risk to the reputation and financial security of those involved in your plan.
Note also that all bonds must be obtained through an entity appearing on the Department of the Treasury’s Listing of Approved Sureties, Department Circular 570.
If you are at all unsure whether your bonding is commensurate with the requirements for your plan, seek additional information from DirectAdvisors.
Fiduciary Liability Insurance: The Basics
Fiduciary liability insurance is just what it sounds like. It is an insurance policy that a fiduciary purchases to protect themselves in case they breach their fiduciary responsibilities where the plan is concerned.
It’s important for fiduciaries to have this protection in place, since they can be held personally liable for any losses a plan incurs. That said, this sort of insurance policy is technically not required by law.
Having fiduciary liability insurance in place may safeguard against personal liability in the event of a plan loss. Additionally, were the Department of Labor to investigate the plan, they would check the insured status of the fiduciary. Having insurance in place would be invaluable in such a scenario.
Though fiduciary liability insurance policies were once straightforward and simply limited the liability of fiduciaries in the case of a plan breach or administrative error, they have become increasingly complex. Today, a fiduciary liability insurance policy might also cover the cost of plan corrections, legal fees required in a defense trial, and even regulatory penalties.
Mitigating Risk with Insurance and Bonds
Through proper hiring, complete with thorough background screenings and verification of education and certifications, you can take the first steps to ensure anyone working on an employee benefits plan be trustworthy and knowledgeable. However, even the best hiring committee can overlook red flags, and mistakes on the job are always a possibility.
In a litigious society, it’s essential to be prepared beyond the minimum ERISA-required bonding level. Once you are sure that you’re meeting or, ideally, exceeding your requirements under ERISA Section 412, take the time to learn about fiduciary liability insurance. With these two risk-mitigation measures on your side, you are much better protected against plan losses or overt fraud.
Contact DirectAdvisors today with questions or for help determining the best ways to mitigate your plan’s risk through proactive measures. We ca be reached by email at [email protected] or by phone at 518-362-2119.